Black Swans and the Perils of Prediction

This week’s world-class thinker is Nassim Nicholas Taleb. “NNT”, as he calls himself, was born and raised by a highly political Greek Orthodox family in Lebanon, but studied in the USA and Europe. He now lives in the USA and is visiting professor at various universities and Professor in the Sciences of Uncertainty at Massachusetts University. NNT is an incredibly interesting human being. Fortune selected his second book Fooled by Randomness as one of the “smartest books of all time”. He has a formidable brain, thankfully tempered by a fine sense of humour: for example “My major hobby is teasing people who take themselves and the quality of their knowledge too seriously and those who don’t have the guts to sometimes say ‘I don’t know...”

He writes that before the discovery of Australia, Europeans thought that all swans were white, and it would have been considered completely unreasonable to imagine swans of any other colour. The first sighting of a black swan in Australia, where they are quite common, shattered that notion. This leads to his first, big insight!

First insight: “Black Swans” are highly improbable events that have a huge positive or negative impact on our lives. (while it is almost impossible to predict them, we can be alert to recognize positive or negative Black Swans once they have occurred). Taleb is fascinated by rare, unpredictable yet pivotal events that shape our world far more than the myriad of mediocre happenings that occur regularly. And a troublesome characteristic of these enormously important Black Swan events is that they are virtually unpredictable.

Examples of Black Swans are: the rise of the internet and its impact within a relatively short slice of time; the invention of Google and how it has changed the lives of everyone who uses it; the revolutionary upheavals of recent times in North Africa; the Japanese Tsunami. We are still (hopefully) recovering from the recent crash in world markets. And although the next crash of world markets will surely come, who knows precisely what combination of events will precipitate the disaster – it’s an unpredictable Black Swan. (Here his advice is always to be conservative with 85% of your assets and to speculate wildly with 15%, looking for the massive returns that a positive Black Swan can bring).

What would constitute a South African Black Swan? The technically correct answer would be “who knows?” Looking back, the negotiated settlement between the ruling Nationalist Government and the once banned and exiled ANC was clearly a positive Black Swan. What would constitute an American Black Swan? The assassination of Barack Obama by the crazies in the Republican right wing with Sarah Palin sweeping into office? Clearly a bad Black Swan. Perhaps a possible global Black Swan that would severely impact our lives is if the oil price hit and stayed at something like $150 to $200 a barrel! Improbable but not impossible, a typical Black Swan!

Second insight: Inventions and discoveries usually owe more to luck and randomness than to carefully planned research. Many of the discoveries that have had a huge impact on our culture were accidents discovered while people were looking for something else. For example, Penicillin was just some mold inhibiting the growth of another lab culture; despite massive expenditure on cancer research, chemotherapy was discovered as a side-effect of mustard gas in warfare (people who were exposed to it had very low white blood cell counts). And look at one of today’s big pharmaceutical money spinners, Viagra – it was devised to treat heart disease and hypertension before it rose to other heights.

Luck and randomness also play a huge part in the success of the stars in all spheres. Bill Gates is not a business genius; he was tinkering around with creating some operating software for IBM’s Personal Computers and was lucky enough to negotiate a deal at the right time with the ailing giant that resulted in him being rewarded out of all proportion to his effort. But this brings us to the third insight.

Third insight: random tinkering is the true path to success! We need more uninhibited, aggressive, proud tinkering! What Taleb is arguing for is this: most economists are too bathed in enlightenment-style cause-and-effect to realize the effects of wild randomness. Tightly planned and narrowly lived lives and businesses and organisations are highly unlikely to reach the dizzy heights of success that can be achieved by those who constantly try new things, slightly different things, those who tinker with what is to produce what might be. Taleb chides us to make our own luck: we can be scared and worried about the future, or we can look at it as a collection of happy surprises that lie just outside the path of our imagination.

Nassim Nicholas Taleb is an eye-opening thinker, one who teases our intelligence. He awakens us to the Black Swans, more prevalent than we suspect, that lie hidden at the edges of the tiny and tranquil ponds of our daily lives.

Randall Falkenberg